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Preliminary note: We at Management Kits are passionate about innovative ways of organizing and helping organizations to perform competitively and become more effective and rewarding to work for. On our blog we regularly review and discuss innovative management concepts that we believe have the potential to make management work better.

The ideal world of organizational federalism

One classical juxtaposition in management is between top-down and bottom-up approaches. In the top-down approach, a strategy, directive or initiative is defined in upper management and then “cascaded” down the org chart. Recognizing that this approach often ignores the knowledge and experience at lower levels of the organization, and thus has disengaging effects, bottom-up approaches allow for changes to originate from below, often seeking informal ways and mechanisms to work through traditional management hierarchies. In an ideal world (or a well-functioning organization), the two approaches would be balanced to create a kind of “organizational federalism”[i]. This means that different organizational levels hold different competencies and powers, and it allows lower levels to experiment and autonomously find the best ways to get their job done. This is governed by some general confines and binding rules across the whole res publica of the organization.

The much-discussed management system called “Holacracy”[ii] diverts from the logic of both top-down and bottom-up approaches and their interplay and balance. At first it does so by challenging traditional forms of hierarchy. But more fundamentally, this challenge to hierarchy obliges all organizational members to follow a so-called “constitution”, which, in abstract, juridical language, outlines the governance rules that are equally binding for all organizational members. The key aspect of these rules lies in the distribution of authority throughout the organization, structured by roles and circles instead of functions, job descriptions and divisions. Organizational members fill multiple roles and act in different, but interconnected, self-organized teams (“circles”). Within these circles decisions are made locally, based on predefined processes identified in the constitution. Through the use of “governance meetings”, the circles revise their processes and internal roles frequently, thereby supporting ongoing organizational adaption rather than triggering major reorganization processes every other year.

Is Holacracy the future of organizational structuring? In our view, management innovations are neither simply old wine in new skins, nor do they represent a long-overdue revolution, clearing away all that was wrong at once. If the innovations gain traction, they usually do address pertinent issues in modern corporations and have plausible approaches to overcome them. It’s the same with Holacracy. Even as the hype cycle that accompanies the emergence of management fashions seems to be flattening – with ambivalent reports coming from some of the most prominent adopters of Holacracy, such as Zappos and Medium – the concept still warrants attention for its ambition and consequences.

A super-formal approach to organizing

Placing Holacracy in the context of the top-down vs. bottom-up debate, the concept seeks to overcome the deficiencies of a rigid top-down “directivism” while avoiding the potential chaos and misalignment resulting from an emergent, bottom-up approach. Its approach thereby is a strict set of rules by which organizational members are organized laterally – for example by a binding meta-structure for each type of meeting. Its approach is fundamental and holistic. In contrast to more medium-range efforts, which look at how meetings are done or how decisions are made, Holacracy seeks to overcome issues at the root, at the very ground level of organizing.

This fundamental claim results in a highly formal approach to organizing, as a read-through of the constitution – don’t expect an easy read – will tell you quickly. There is virtually no reference to what frequently have been referred to as “soft factors”, such as people, change or leadership behavior. Such factors are often invoked to mitigate deficiencies resulting from formal elements of organizing, such as dysfunctional hierarchies, frequent change efforts, rigid processes or structural silos. With Holacracy, this formalism is not subject to decision making by top managers, however, but hard-coded into management processes under the constitution.

This hard-coding of management processes is not the only thing Holacracy has in common with Information Technology settings, as Brian Robertson, IT engineer and primary developer of the system, initially developed the concept for his own software firm. (It’s worth noting that a portfolio of IT development projects lends itself well to a self-organizing approach and that IT is relatively lightly regulated so far – just imagine regulators’ reactions if big pharma or systemically important banks proposed company-wide self-governance.) At the heart of Holacracy seems to be the belief that organizations can be programmed, and that it is the quality of the code that determines outcomes. As a result, the code can overcome the messiness of human interactions and social arrangements, which, at the end of the day, depend so much on behaviors and other soft factors – and here’s the paradox – while leading to higher levels of autonomy, adaptability, and human self-expression in organizational settings. All because the rules give organizations the means to self-manage and exert power from within a coherent overall system.

How to exert leadership and informal authority in Holacratic settings

Holacracy’s formal process rigidity, which is supposed to lead to content autonomy, has been reported to slow down decision-making processes in practice (see the Medium example referred to above). This raises the question of how to capture the benefits of factual differences in competencies and relevant experiences of organizational members, and whether there are some benefits to reflecting those differences in formal hierarchy levels also (which essentially provide more immediate access to exert power in formal settings, such as access to information, a first move at shaping the agenda, decision rights, and responsibilities, etc.). Needless to say, formal hierarchies themselves can become a goal, and thereby lose their legitimacy. Organizations that are skeptical of Holacracy and its consequences – but sympathize with its principles and goals – may at least question their spans of control and hierarchy levels in the light of legitimate sources of authority (e.g. competencies and experience), as well as how initiatives are coordinated across organizational units to solve non-standard problems.